Can Spain's Reform Guru Spread the Faith?

It was a brazen claim. Gathered for a summit in Lisbon two years ago, European politicians vowed to weld Europe's insular, regulation-bound economies into a world-beating dynamo by the year 2010. Big talk--and little follow-through. Now, Spanish Prime Minister José María Aznar is out to change that. As he assumes the six-month rotating presidency of the European Union, Aznar is putting his own credibility on the line by setting a vigorous, free-market agenda for the EU's upcoming summit on Mar. 15. "The EU has to make progress," says Edward Bannerman, head of the business and economics unit at the Centre for European Reform in London. "If it fails, Europe will be locked into a model of slow growth, welfare dependency, and a sagging euro."

Converting Aznar's ambitious agenda into deals won't be easy. The rotating EU presidency, constrained as it is by the divergent politics of member states, is a difficult place from which to bring about change. Besides, politicians facing national elections this year in France, Germany, and three other EU countries will be reluctant to make bold moves, fearing voter backlash. And recession already has strained budgets and limited politicians' room to maneuver. But given the disappointing progress to date, a failure by Aznar to achieve key agreements for the acceleration of structural reforms would reveal a floundering Europe--incapable of action and devoid of a commitment to a more competitive economy.

If anyone has a chance to galvanize the EU into resurrecting the reform drive, it's Aznar. Since he took office in 1996, his government's program of privatization, liberalization, and labor market reforms has helped transform Spain into one of Europe's fastest growing countries. Over the last five years, the Spanish economy has added 3 million jobs--one out of four created in Europe. Growth this year is forecast at 2.2%, compared with 1.2% to 1.4% for the EU. "The Spanish have shown that market liberalization creates growth," says Manuel Balmaseda, economist at Banco Bilbao Vizcaya Argentaria in Madrid.

To spread some of that magic across the Continent, Aznar is working to speed up full liberalization of markets for energy, transportation, and telecom. "Energy liberalization is the EU's big litmus test and will show whether they are serious about reform," says Bannerman. Aznar is getting support from European Commission President Romano Prodi, who recently warned that if member states don't liberalize markets, he will wield the powers of the Competition Directorate to pry them open--a big stick EU officials used to successfully crack open Europe's telecom market in the 1990s.

Aznar's efforts could get a boost from the growing conviction among politicians on the left and right that Europe's sluggish pace of change is seriously damaging its growth prospects. On Jan. 21, a wing of France's Socialist Party published a proposal arguing for a radical rethink of the party's attitude toward free markets. Add to that the euro's arrival on Jan. 1, which is forging a new transnational economic mindset. "The euro has made traditional ideas about national markets look suddenly out of date, even Jurassic," says a Spanish official.

Aznar wants to capitalize on the euro's success to speed up the creation of a single European financial market. His team is working doubletime to help resolve a procedural dispute between the European Parliament and the Commission over the implementation of Europewide rules on securities and financial services.

No question, individual politicians could still throw a monkey wrench in Aznar's summit machinery. Britain, Portugal, and Scandinavia strongly support his liberal agenda, but France, Germany, and Italy have resisted many free-market reforms. And despite Aznar's aim to lobby for greater labor market flexibility, no concrete agreements are expected. "Labor market reform is not the stuff of summits. It's a jungle of different national rules and regulations," says Daniel Gros, director of the Centre for European Policy Studies in Brussels. Someone, though, has to start hacking a way out.

By Gail Edmondson in Rome, with Philip Schmidt in Madrid

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